Policy Wonks Go to Battle Over Minimum Wage

ByDavdi R. FrancisJanuary 26, 1996

BSURD position.'' ''Ludicrous claim.''

Those are phrases flung about by a group of economists engaged in a fast-food fight over the merits of a minimum-wage hike.

''Policy wonks have a no-holds-barred approach to each other,'' notes Carlos Bonilla, a policy wonk himself at the Employment Policies Institute in Washington. The think tank is sponsored by restaurant chains, retail firms, and other major minimum-wage employers.

The scrap picked up new relevance this week when President Clinton renewed his call to Congress to boost the minimum wage. ''Within a year,'' he said, ''the minimum wage will fall to a 40-year low in purchasing power. But millions of Americans and their children are trying to live on it.''

Clinton seeks a 90 cent hike over two years from the present $4.25 an hour ($8,500 a year). The Republican-controlled Congress may not go along, but polls show nearly two-thirds of Americans support a hike. House minority leader Richard Gephardt (D) of Missouri reportedly wants to make an increase the No. 1 issue of the 1996 presidential campaign.

Moreover, at least 10 state and local efforts to raise the minimum wage are under way, including a ballot initiative in California and bills in Massachusetts, New York, and North Dakota. Some cities - Baltimore and Jersey City, N.J., among them - are considering requiring contractors doing business with them to pay a ''livable wage'' - a type of minimum wage.

The fuss among the economists started when two Princeton University professors, David Card and Alan Krueger, surveyed by phone fast-food restaurants in New Jersey to establish the impact on employment of the increase in the state minimum wage to $5.05. The same questions were asked at restaurants in eastern Pennsylvania where Wendy's, Burger King, and other chains faced no minimum-wage boost.

The results caused a sensation: New Jersey restaurants didn't lay off workers, and may even have hired more workers. The Clinton administration embraced the report with enthusiasm. Mr. Krueger took leave to become chief economist at the Department of Labor for a while.

Business opponents of an increase in the minimum wage were shocked. They had always argued that such an increase would prompt employers to lay off many workers because they could no longer make a profit off their labors. With 4.2 million workers earning the minimum wage (or even less pay but getting tips as well), plus another 10 million or so earning only somewhat more and thus likely to get their wages bumped up as well, tens of billions of dollars are at stake.

Further, the study was seen as a threat by the neoclassical school of economists - free-enterprise enthusiasts who hold that a hike in prices (wages) must reduce demand.

An ideological divide in Congress between conservative Republicans and liberal Democrats added spice to the debate. The last time Congress voted to raise the wage in 1989, a large majority of both parties went along. The Department of Labor quotes Senate majority leader Bob Dole as saying: ''I never thought the Republican Party should stand for squeezing every last nickel from the minimum wage.'' He and House majority leader Newt Gingrich voted for the hike.

To counter the Card-Krueger study, the Employment Policies Institute obtained actual payrolls from 70 of the same fast-food restaurants. Two other economists, David Neumark of Michigan State University, East Lansing, and William Wascher of the Federal Reserve in Washington added 150 other establishments. Mixing the two chunks of data, they found that the New Jersey minimum-wage hike did cost jobs. Their work indicated Clinton's plan would decrease minimum wage hours - not jobs - by 5 percent.

The debate became centered to considerable degree on which pair of economists had the better set of data. Earlier this month, John Schmitt at the liberal-leaning Economic Policy Institute came to the defense of Card and Krueger with a nine-page briefing paper holding that the Neumark-Wascher study really showed no employment change.

Opponents now concede that the overall job loss from a modest minimum-wage hike is small. But Neumark and Wascher find that a higher wage will prompt employers to substitute higher-quality for lower-quality workers (some from the slums where jobs are most needed), a shift proponents dispute.

Pro-hike forces make these points: (1) Eleven million working Americans would get a pay raise. Those working full-time at the minimum would get an extra $1,800. Some workers would be lifted out of poverty. (2) Two-thirds of minimum-wage workers are adults, not teenagers flipping hamburgers.

Such big numbers have political clout. But wage hikes wouldn't be free. Business will lose profits, raise prices, or become more efficient.